November 16, 2004

by Charles Waltner, News@Cisco

Financial institutions are banking on Cisco Systems' Internet Protocol (IP) networks to address the storm of changes taking place in their industry.

Financial executives say Cisco IP networks provide the foundation for creating the services they need, whether that's data integration, scalable telephone systems, security, video content delivery, wireless connections, or image transfer.

Certainly, the needs of financial institutions are showing in Cisco's bottom line. The financial services market has become one of Cisco's largest and fastest growing vertical categories, says Rune Olslund, a marketing manager in Cisco's Financial Services industry vertical group. For Cisco, financial institutions include community banks, credit unions, national banks, commercial banks, investment banks, thrifts, trading exchanges, financial services managers, insurance carriers, insurance agencies and their adjusters. But sales to retail banks and credit unions have been especially active, Olslund says. And that will likely continue. With more than 18,000 banks and credit unions in the U.S. only, accounting for more than 100,000 branches, there are plenty of customers. Research indicates 30,000 to 40,000 of those branches will be upgraded with new networking technology over the next two to three years.

Olslund says three events have combined to create the "perfect storm" of demand Cisco is now experiencing for its IP-based networking products. First, he says, banks are investing heavily in their branches. During the Internet boom, it was the fashionable strategy to declare bricks-and-mortar branch banks to be "on their way out," Olslund says. "But just the opposite happened. Marketing studies clearly indicate that people still want face-to-face interaction for many of their transactions, especially for loans or to set up financial investments."

Olslund says that Internet banking certainly wasn't a lark. Many customers use the Internet for basic account maintenance tasks, including electronic bill payments, and start their shopping process there. But banks realized that branches are an equally important channel that needed to provide the same level of retail service found in other consumer good outlets, such as department stores. Many banks are looking to IP network technologies to help get their branches up-to-speed and integrated with their Web sites, ATM machines, and call centers. That requires a sophisticated network, with the intelligence to manage all those channels in unison, Olslund says.

Bandwidth is also a key to boosting the retail experience, says Peter Simonsen, vice president of information systems at Arizona State Savings & Credit Union. "If you don't have the bandwidth to deliver a good consumer experience, you are really behind the eight ball," he says. "It's all about the customer experience. Before, tech spending was never seen as a competitive advantage. But now it is crucial to any financial institution's success."

Olslund says another influence driving adoption of IP networks is the U.S. Check Clearing for the 21st Century Act, commonly known as "Check 21." Check 21 was prompted by the 911 attacks. When planes were grounded, financial institutions had no way of clearing checks. Check 21 allows banks to process checks via electronic images rather than having to transport the actual checks. Though some banking professionals say the savings from Check 21 is not enough on its own to push a bank to update its network, it is clearly a great opportunity for reducing costs. And with 40 billion checks flying across the country every year, that adds up to a lot of money.

Bryan Wilken, the vice president of information technology for Bank Midwest, a regional bank in Fairmont, Minn., says Check 21 will likely save his company 10 to 15 percent per year in check processing costs. With electronic check images, Wilken notes, banks can also save by using software to automate check processing, such as automatically recognizing checks that require priority or ones that need special handling, such as returned checks.

Though banks have a variety of reasons for boosting their networks' bandwidth, Check 21 is a particularly strong influence, since many banks still run under-slung 56 kilobit per second (Kbps) connections to their branches. Those narrow-band pipes can't handle the large files of document images.

Olslund says the third influence on IP networking adoption in the financial services industries is the recent collection of legislation governing privacy protection (Gramm-Leach-Bliley Act), accounting (Sarbanes-Oxley Act), and money laundering activities (Patriot Act). While many of these laws concern larger banks or investment houses, the message is clear. Financial institutions are responsible for safeguarding their customers' information from electronic piracy must maintain detailed records and electronic paper trails. Such improvements require sophisticated and integrated information technology systems that can provide extensive security and system-wide monitoring, reporting, and controls. Again, the older generation networks don't offer the capabilities to easily comply with these legislative mandates, Olslund says.

Arizona State Savings & Credit Union's Simonsen says security has certainly been a key driver to his organization's networking upgrades. "What is happening is that currency is being converted to digital ones and zeros," Simonsen says. "If you look at it from that perspective, network security becomes paramount. In the past, we figured out ways to thwart bank robbers. Now we need to learn how to prevent electronic bank robberies. I think many financial institutions are just now waking up to this fact."

Like many progressive banks, Arizona State Savings & Credit Union and is using every tool at its disposal to create a layered, multi-faceted defense against attacks. It has deployed an array of modern network security devices and software from Cisco and other vendors, including multiple firewalls, intrusion detection systems, and the Cisco Security Agent, which monitors "end-points" such as PCs and servers for suspicious activity. And Wilken from Bank Midwest says Cisco's virtual local area network (VLAN) technology lets him easily segregate and insulate parts of his network from the public Internet.

Beyond the three factors identified by Olslund, Wilken says investments in IP networks are investments in growth. Given the ongoing consolidation in the industry, banks that stay in business will likely grow by acquiring more and more branches from other banks. Crucial to success will be efficient integration of the new branches' computer and communications systems, Wilken says.

IP networks provide radically improved management capabilities compared to older infrastructures. Simonsen notes that by converging all electronic activities onto one IP-based network, management becomes far easier. "Everything, whether it is a printer, a phone, a server, or a personal computer, becomes a node," he says. "The process for managing all of these is the same. You can make changes to any part of the network much more quickly and cost-effectively."

Both Simonsen and Wilken say Cisco's voice-over-IP phone technology, known as IP Communications, is the most dramatic example of this. By changing over to IP-based Cisco phones, which can send phone calls over a wide area network (WAN), both financial institutions gained significant reductions in annual expenses while boosting productivity. Banks, with their scattered branches, instantly earned a significant dividend from eliminating long-distance charges for inter-branch calls. Also, Wilken, for example, was able to switch a new branch's phone system over to Bank Midwest's Cisco IP Communications voice network in just a weekend. And by converting Arizona State Savings' call center to a Cisco IP Communications system, Simonsen says the call center's efficiency has improved by 15 to 20 percent, with some agents handling up to 200 calls a day.

Having a solid network foundation also brings competitive advantages for innovation, Wilken says. His company, for example, plans to test out wireless service in a cyber cafe-type self-service model at one of its branches. Wilken is also looking at IP-based content delivery to set up plasma screen kiosks at banks for running streamed video financial services product promotions, relevant business news, and other information to make a customer's visit to the branch more interesting and enjoyable.

Simonsen says Arizona State Savings & Credit Union is using streaming video to train its far-flung employees. He figures anything that can help customer service and customer retention is well worth the investment. "Training on an integrated network can have a huge impact," he says. "It costs more than $300 to obtain a new customer so why not take care of the ones you already have?"

Wilken admits that his bank's early investments in IP technology were not without trepidation. "At the time when I started the projects, such as our initial VoIP system, the bandwidth of the network and all the investment seemed like expensive overkill to our management and even to me," he says. "But looking back, they have turned out to be some of the best decisions I've ever made. And most of all, management has been extremely happy with the results."

(To find out more about how IP networking is helping financial institutions, Cisco and its customers Wells Fargo, Woodforest Bank. Mountain State Credit Union, and Cole Taylor Bank will be speaking at the Bank Administration Institute's Retail Delivery Conference and Expo, November 16-19 in Las Vegas.)

Charles Waltner is a freelance journalist in Oakland, Calif.